The U.S. economy is experiencing a shock the likes of which I’ve not seen in my lifetime, and I was on the front lines of the financial crisis in 2008. While there are more unknowns than knowns about the scope of both the health and the economic threat caused by the novel coronavirus, we can still collect a set of relevant facts that provide at least a partially focused picture of where we’re at and what’s likely ahead.
Probably the easiest way to explain why the risk of recession has gone, in just a few weeks, from maybe 10 percent to 20 percent to north of 50 percent is not, or at least not solely, the mere 16 trading days it took for the stock market to shift from bull to bear. It’s “the fastest decline ever and nearly twice as fast as the stock market crash in 1929,” according to USA Today. It’s the fact that the U.S. economy is 68 percent consumer spending (compared to about 55 percent in Europe and 45 percent in China). Shut down the consumer and you shut down the economy.
And that is what’s happening. Broadway shows just went dark in Manhattan; conferences, vacations, cruises, flights, sporting events—the whole remaining NBA season—are shutting down. People working from home won’t be going out to lunch, a negative “multiplier” that will ripple through the economy as food prep workers and servers will face fewer hours and layoffs. These are some of the economy’s most vulnerable, low-wage workers, as most have neither paid leave nor savings to fall back on. NBA players will, of course, be fine. It’s the folks who sell concessions at the games that I’m worried about.
And no one can say when the consumer economy will fully reopen for business. For at least the near future—weeks for sure; months, probably—the country, the markets, the economy will all be in unprecedented territory.
How much can the usual anti-recessionary tools help? Monetary policy, the purview of the Federal Reserve, is less helpful than usual. The Fed’s premier tool is to lower its benchmark interest rate, which it has done aggressively and will likely do more of next week. But lower interest rates won’t restart Broadway shows and the NBA, nor will they make your family feel safer going to the local restaurant. The Fed is playing a critical behind-the-scenes role right now in making sure the plumbing of credit markets doesn’t get clogged, but that’s a palliative, not a cure.
Fiscal policy, or government spending, on the other hand, if quickly and properly deployed, could make a real difference in the economic lives of those who will be hurt by what’s coming. And, as is always the case with “countercyclical” spending—fiscal spending to offset a temporary contraction—it can help the broader economy too.
Even our extremely partisan Congress recognizes the truth of this fiscal point, and they’re actively debating what to do. They should be guided by these principles.
First, work very quickly. Compared to other countries, the U.S. is shamefully behind on our medical response, both in terms of testing and surge preparedness. We should not get behind the curve on the fiscal response. We know what’s coming: much slower GDP growth, higher unemployment, and falling incomes.
Second, deploy measures that hit back hard and fast against the potential downturn. Increasing the federal contribution to state Medicaid programs is a fast and administratively straightforward approach. We did it in the last downturn by tweaking the fed-state match formula, and the money proved to be essential to states. The fact that state health systems are already stressed makes this intervention even more timely.
Another quick way to get money to people who need it is to send them checks, as the George W. Bush administration did in 2008. Research shows that the money went out relatively quickly (though not quickly enough; it took three months back then; we need to do better this time) and was especially helpful to those with low incomes.
Next, we need to find a way to replace paychecks to people idled from work who lack paid leave. Economist Jesse Rothstein and I sketched out such a proposal earlier this week, by which employers temporarily keep paychecks flowing to workers and get reimbursed by the government for doing so.
That simple, three-part plan—fiscal relief to states, checks to households, and paid leave to those without it—frame a robust, get-out-in-front initial response, though more will be surely be needed. I’ve also chosen these ideas because I think Democrats and Republicans can agree on them. The Bush administration sent checks to households at the start of Great Recession, state fiscal relief was bipartisan (and praised by Republican governors), and while Republicans have resisted permanent, government-backed, paid-leave programs, they have (including President Trump) signaled openness to a temporary program.
All this spending will need to be deficit financed but if there’s a silver lining here, it’s that because equity investors have fled to the safety of bonds, borrowing costs are lower than ever. That said, we are up against one of the most potentially economically threatening events in our lifetimes, and the costs of failing to act decisively by the principles outlined above are immeasurably greater than any monetary debt we’ll incur.